Oct 01, 2012

WaPo on Virtual Economies

Nice article on virtual economies, this weekend in the Washington Post. I still wonder about the economy. Here we have the Fed moving into unprecedented degrees of stimulus, after almost four years of huge deficit spending. The textbooks say that our economy should be screaming along by now. In fact, the textbooks I studied in the 1990s all would have judged the current policies to be dangerous. If you push a machine hard for a long time, they said, you're going to break the machine. But this machine won't run. The government is doing everything in its power to make the economy go, and it just sputters along. The rules must have changed. I keep wondering if we're seeing the first effects of a broad virtualizing of the economy. It doesn't take much to make an economy sputter. If the people simply decide to spend less money, even a couple of percent, it's enough to get the whole thing to sputter.

What have we come to expect of a "healthily growing economy," after all? We expect something like 1-3 percent real growth per year. That means, 4-6 percent measured growth, with 3-5 percent inflation. This is what we've enjoyed ("we" being the developed countries) since about 1800. Think about how different, how much richer, the world has become since 1800. From the standpoint of human history as a whole, a persistent 1-3 percent growth in wealth is extreme. It ain't normal in any way, shape, or form. Until 1800, and for most people in the world even now, "normal" meant subsistence. But we expect now to go beyond subsistence, persistently. We insist that this must be so, now and forever, indeed for everyone.

Folks in the Green movement might say that this is precisely the problem, that we have been growing too fast for too long and are now suffocating the planet with our flesh.

The vision of perpetual enrichment is internally consistent. If everyone is devoted to getting more stuff, their passions spur the economy to grow rapidly. Their demand for things create profit opportunities. The profit opportunities attract productive resources. Stuff gets made and sold. The profits enable people to pursue still more passions. The machine runs.

But virtuality throws a small wrench in the works: Satisfaction at extremely low cost. Suppose we discovered that we could satisfy all of our mental needs by sitting down in a quiet room and meditating. The economic consequences would be catastrophic, wouldn't they? A society of hermits needs food and a bunch of quiet rooms - that's it. Therefore a society moving toward hermitage will have an economy in free fall.

Now compare two groups of people: "Car People" and "Internet People." Car People are folks from the 1950s. They want big houses, fast cars, fine food, prestigious degrees, big families, high-powered jobs, and sexy sex. They want stuff to play with and they want stuff to happen, all the time. They are out and about. Internet People are folks from the 2000s. They want sugar and fat. They want freedom - from work, obligations, expectations. They want sexy sex (some things never change). They connect online, hang out at home, and commit to nobody and nothing. They hate ads and avoid them wherever possible. They want to pass the time as cheaply as possible.

Internet People are not hermits by any means, but they are a lot closer to hermitage than Car People. Their interest in the acquisition of material stuff may just be 10-20 percent lower than that of the generations before. They still want stuff, but they're happy to get it virtually. If that's true, then the turn to the virtual may explain why the economic machine just doesn't seem to run like it used to.

I understand this argument. I think its very interesting and deserves further exploration. Still, I'm skeptical of some of your conclusions. The move into the virtual requires an enormous displacement of physical, financial, and human capital. Someone has to build the servers, design and construct and pay taxes on enormous cloud server farms, lay the fiber optic cables, build the TVs and computers used to get into virtual spaces, provide customer service, and launch the satellites. Someone has to design the places that people go to, debug them, and respond to consumer demand for them. Someone has to create the virtual items that people buy. People will want to go to the best virtual space, and with switching costs being so low and network externalities being so important, monopolies will naturally form. Regulation of monopoly will be demanded, and provided.

These structural shifts are no doubt disruptive, but the idea that they might cause value - denominated in real dollars - to somehow stagnate or even decrease suggests that people would not prefer to go virtual. Going virtual does not mean the drive to consume ceases. If going virtual is attractive, then real-world firms will start competing for attention, so that the sum total and/or quality of what is consumed both virtually and really should increase.

So I wonder if we can fill in some of the blanks here. When it comes to virtual lives, when is value no longer tracked by standard measures of GDP? When is more investment in the real infrastructure that on which the virtual resides no longer growing? Why wouldn't people want and pay top dollar for ways and methods to make virtual interaction - dare I say it? - more real, more material-like?